The paint may be drying here at biopharma #2, Neurocrine Biosciences (NBIX), but it’s hard to tell. To be sure, another quarter has transpired, and the company is still tooling along on phase 2 trials of their GnRH antagonist candidate drug for fighting endometriosis, elagolix, still trolling for a partnership for that drug (evidently whatever specific agreement they were reportedly close to late in 2007 is now just a fond memory), still conducting seemingly endless funeral services for their failed sleep remedy drug, indiplon (they still await minutes of their July meetings with the FDA), and still producing red ink (although less so: they only lost $18MM in 3Qo8 compared to $21MM in each of the first two quarters of the year…the cost-cutting measures the new CEO instituted early this year appear to be bearing fruit). They now have $208MM of cash which appears to be about a two-year supply. Should get them through phase 2 testing of elagolix and hopefully by then there will be a partnership.
Archive for October, 2008
Posted by intelledgement on Wed, 29 Oct 08
Posted by intelledgement on Wed, 29 Oct 08
The Federal Reserve effected their $125 billion TARP fund preferred share purchases yesterday, and so as of now, with our short positions in Bank of America (BAC), Goldman Sachs (GS), HSBC Holdings (HBC), and Wells Fargo (WFC), we are officially betting directly against the Fed. (Well, actually with HBC, it is an unofficial bet as the Fed did not buy any stock in that one. And technically, we are not directly betting against the Fed because they have purchased preferred shares and we are short common shares.) So far, on that score it is Fed 1, ISOP 0, as yesterday saw another round of dramatic gains in share prices: BAC +12%, GS +1%, HBC +9%, WFC +12%.
But now the good news (which, of course, considering we are discussing short positions, is really bad news). Even with yesterday’s big share price gains (except for GS who are beset by concerns about their true level of toxic asset exposure), we are still ahead of where we were at the last spike, two weeks ago, as the price per share of all four stocks had dropped off since then. Systemic risk is still evident, and we believe the odds still favor opportunities to exit these positions at lower price levels…plus, of course, they continue to serve as insurance against a meltdown so long as we hold them.
Having said that, we do need to begin thinking about an exit strategy. None of these banks are likely to fail anytime soon with the Fed backing them up. For that to happen now, the Fed would essentially have to fail and that is not in the cards. With the outcome of the election next week pretty much a foregone conclusion, we are likely to have a spasm of optimism that the new administration will do better, and that could engender a stock market rally of unknowable duration.
Which raises a key question: will the Obama administration break with the disastrous Bush-Clinton policies of weak dollar-low interest-deficit spending-pro bubble that got us here? If so, it will require a lot of immediate pain—which can be blamed on W—and cutting loose a lot of deadweight banks…in the short run, bad news for the stock market in general and good news for our shorts in particular. (And potentially great news for the USA, as it means a reversal of our drive towards disaster.)
On the other hand, if the new administration does the expedient thing and decides (as has every administration since Nixon took us off the gold standard) to kick the can down the road again, then the Fed will elect to keep interest rates low to encourage lending and stave off deflation, and that should result in a boost for equities. In effect, we will be getting sugar pills for our illness, which will taste good, and may even make us feel better temporarily, but will do nothing for our illness. If this happens, however, we will probably need to cover our shorts.
Unfortunately for the USA (and our short positions), the odds favor the can-kicking scenario. Obama has made huge spending promises to his constituencies in the course of the campaign and the Democrats in Congress were more supportive of the Wall Street bailout than the Republicans. It will be elucidating to see whom he nominates/appoints to key financial posts in the coming weeks. Stay tuned.
Posted by intelledgement on Mon, 27 Oct 08
Today Vertex (VRTX) reported a 3Q08 loss of $130MM, compared with $107MM a year ago. The wider loss is primarily due to decreased income—$32MM of revenues, compared to $41MM for 2Q07 thanks to the sale earlier this year of the company’s HIV drug royalty stream and a mere $1MM in interest income compared to $7MM last year in consideration of the lousy investment climate and increased interest payments on the Feb 08 debt issuance. (VRTX have $920MM in cash, so it’s bracing to learn that even in the horrible 3Q08 investment climate, they didn’t lose any money. LOL they sure beat the IMSIP!)
Of course, the financial results really don’t matter too much, as we are talking about a development-stage biotech company with no product-related income other than milestone payments for prospective products. What really counts is the status of those development efforts, and the press release includes a helpful update on the progress of all their current trials and research…and for more details, you can check out the Q&A in this transcript of the conference call they held earlier today.
Posted by intelledgement on Mon, 20 Oct 08
Our development-stage biotech company, Vertex (VRTX), made news today and for once it had nothing to do with telaprevir. The company released results from a small phase 2a study of their cystic fibrosis candidate drug, VX-770, and according to the press release, Vertex management deem these good enough to warrant a move into phase 3 trials in the USA and Europe, pending regulatory concurrence.
There are an estimated 30,000 people in the USA afflicted with cystic fibrosis (CF), a fatal genetic disease caused by a genetic mutation that impedes breathing. Currently available therapies treat CF by managing the symptoms of the disease…but not all that effectively, as the median life expectancy for people with CF is 37 years. In contrast, VX-770 is designed to increase the functionality of the Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) protein on cell walls, which in people with CF, fails to optimally balance salt and water—which results in the fluid buildup in the lungs that impedes breathing. Thus, if it works, it could virtually cure the disease…so long, presumably, as the patient keeps taking the drug, at least.
To date, VX-770 has only been tested on people with a specific type of CFTR mutation known as G551D that is present in approximately 4% of the CF patient population in the USA. Vertex do expect to evaluate VX-770 in patients with other mutations that result in malfunctioning CFTR on the cell surface, but it is unclear if such an expansion would be part of the projected phase 3 trials or require a new set of phase 2 trials first.
Posted by intelledgement on Tue, 14 Oct 08
Actually, this is a general update for all four banks we are short: Bank of America (BAC), Goldman Sachs (GS), HSBC Holdings (HBC), and Wells Fargo (WFC). The Federal Reserve announced today that they were using TARP funds to purchase preferred stock in three of these four—BAC, GS, and WFC—along with six other large banks. Theoretically, “[t]hese healthy institutions have voluntarily agreed to participate” in order to minimize any stigma that might be attached to taking TARP funds. In practice, the market is interpreting it to mean that while these nine big banks may be in trouble, the cavalry has now arrived and the day has been saved. The three participants were each up sharply—BAC +16%, GS +29%, WFC +10%—and even HBC was +2% in the general euphoria.
While we deplore this policy—because we think it is akin to sweeping dust under the rug rather than cleaning it up—we concede that the government has determined that these banks should not be allowed to fail, and we stipulate that there is a good chance that the Fed can throw enough money at the problem to keep them in business for now. However, we believe that neither the proximate problem—huge losses by the banks on toxic assets—nor the underlying issue—the bursting of the real estate bubble—have been addressed by this manna from helicopter Ben. It is indicative of the cluelessness of the authorities that the TARP funds, which were expressly earmarked for the purchase of toxic assets, are now being used for something else entirely. (As we predicted, buying the toxic assets is a non-starter because effecting such transactions would require the banks to revalue them at a fair market price, thus recognizing huge losses and potentially rendering many insolvent.)
Consequently, we are holding all four short positions here, despite today’s huge share price gains (which are losses for us). We are still substantially ahead on GS and BAC, and essentially even on HBC and WFC. We still like the odds that we can do better here.
Posted by intelledgement on Sun, 12 Oct 08
Our retail and direct marketing provider of outdoors merchandise, Cabela’s (CAB) signaled that they are feeling the pinch this week with the announcement of a 10% reduction in their headquarters staff on Tuesday. “This workforce reduction is an effort to reduce costs and improve efficiencies,” stated Dennis Highby, Cabela’s CEO. “While this was a difficult and challenging decision, I believe it was necessary given the macroeconomic environment we are facing.”
The market reacted negatively to the announcement as the stock closed down 3% on Tuesday. By the same token, it has been down 13 out of 15 trading days since we bought it on 19 September, and overall is now—as of Friday’s close—down 35% in three weeks. This from a profitable company that has done nothing but set new Y-O-Y quarterly sales records for the past 17 consecutive quarters! The Street is evidently failing to appreciate our theory that if The World As We Know It ends here due to the meltdown of all the big banks and collapse of all currencies, a company that sells guns and fishing poles is going to be sitting pretty. Well, any portfolio that includes investments in the stocks of individual companies is undertaking a higher level of speculative risk and this is a good example.
Fortunately, stock prices of the three retail-oriented companies which we sold short (BBY-MA-WMT) have also declined sharply—albeit not quite so sharply—and overall, we are ahead on our retailing stock speculations.
Posted by intelledgement on Sun, 12 Oct 08
Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)
Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 2% rate of interest on the listed cash balance.
Transactions: Well, following three months of almost no activity transaction-wise, the market has been crazy, with valuations all over the place—but trending down, big time—and consequently we felt constrained to make major adjustments to the portfolio, mostly moving to the short side. First we shorted a bunch of financial company stocks. Then we sold all our oilers and our one mining stock and bought an ETF that goes up when the price of oil declines. Then we shorted a cohort of retail-related stocks, and—partly as a hedge—bought a fourth retailer. Finally, we covered the WB short. Not surprizingly, the month set a new portfolio record for the most transactions ever: fourteen (the previous record was five)!
- 8 Sep—Sold short 69 BAC for $34.73/shr
- 8 Sep—Sold short 14 GS for $169.73/shr
- 8 Sep—Sold short 30 HBC for $79.11/shr
- 10 Sep—Sold 111 SLT for $11.05/shr (ROI of -44% and CAGR of -47%)
- 10 Sep—Sold 565 BQI for $2.70/shr (ROI of -20% and CAGR of -17%)
- 10 Sep—Sold 245 BZP (purchased 19 Nov 07) for $14.13/shr (ROI of 44% and CAGR of 57%)
- 10 Sep—Sold 186 BZP (purchased 30 Jan 08) for $14.13/shr (ROI of 25% and CAGR of 44%)
- 10 Sep—Sold 300 TMY for $0.27/shr (ROI of -92% and CAGR of -77%)
- 10 Sep—Bought 56 DUG for $42.83/shr
- 19 Sep—Sold short 58 BBY for $41.49/shr
- 19 Sep—Sold short 11 MA for $225.18/shr
- 19 Sep—Sold short 40 WMT for $59.79/shr
- 19 Sep—Bought 170 CAB for $14.08/shr
- 24 Sep—DUG dividend of $2.002/shr
- 30 Sep—Bought-to-cover 57 WB for $2.30/shr (ROI of 94% and CAGR of 172%)
- 2 Sep—NBIX announce positive phase 2 elagolix results
- 10 Sep—BPZ identify bank for $200 million line of credit
- 15 Sep—BAC buying ML!
- 21 Sep—BAC short-selling of bank stocks halted
- 21 Sep—BAC short-selling of bank stocks halted
- 22 Sep—GS now a bank holding company
- 22 Sep—VRTX issue 8.6 million new shares @ $25.50
- 24 Sep—VRTX release new phase 2 telaprevir data
- 28 Sep—BZH settle with the SEC
Comments: Sheesh…this month required an awful lot of work to produce a 6% loss! The silver lining was that the hedgies also lost 6% and the NASDAQ was down 12%, so it could have been worse. Overall after 21 months of operations, the ISOP is now +131% compared with ±0% for the hedgies and -13% for the NASDAQ.
So we did have a lot of company-specific news this month, but it was pretty much overshadowed by the macro-level proverbial excrement hitting the fan. We had the government takeover of Fannie Mae (FNM) and Freddie Mac (FRE) on 7 Sep. A week later we had the bankruptcy of Lehman Brothers (LEH) and the acquisition of Merrill Lynch (MER) by BAC. Then we had a run on the money market funds ($140 billion withdrawn in one week), and the emergency $85 billion loan by the Fed to AIG to avoid a bankruptcy there. To close out the month, you have the spectacle of Republican Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke begging the GOP-controlled House for a $700 billion emergency bailout fund to be used to purchase so-called “toxic” assets that have plummeted in value and threaten multiple financial institutions who own them with insolvency…and being turned down! (Oh, and we almost forgot, the arrangement for Citibank (C) to buy our own troubled asset, WB.)
Clearly chickens are coming home to roost here. As we keep saying, this economy has serious fundamental flaws—too much debt and entitlement obligations, too much energy devoted to unproductive-to-fraudulent financial transactions, an unsound currency, underfunding of infrastructure investment—and the cultural focus on taking the path of least resistance and maximizing the immediate return on investment is impeding us from addressing these long-term flaws. While it would be painful, a collapse of the current Ponzi-based financial system would clear the decks for the creation of a healthier, sounder approach, and the resultant crisis would be resolved a lot faster than is likely to be the case if we just kick the can down the road again here. So we were cheering when the House voted down the Troubled Assets Relief Program, even though the markets tanked on the news. (Of course, by then we were mostly short. LOL)
Speaking of which, the market was extremely volatile this month—it was ±3% on two days, ±4% on three days, ±5% on three days, and -9% on 29 Sep (the day the House voted down the $700 billion bailout bill). Ofttimes the market does not move as much as 9% in an entire year! In that light, it is not a shocker that we felt constrained to make a few moves…such as closing more than half the positions we started the month with and then opening up even more new ones. Among the few holdovers were our two biotech companies (VRTX up 24% and NBIX down 9%), our gold miner (GSS down 1%), and our housing industry short (BZH -14% by virtue of which we gained). As for the newcomers, two of our three financials short were up (BAC +1% and HBC +3%) but GS was down 24% in only three weeks. Two of our three retail-related shorts were down big (BBY -9% and MA -21%) in only two weeks while the other gained a point (WMT +1%). Our oil short ETF (DUG) was down 5% and the retailer we went long on (CAB) manifestly should have been a short as it was down 14%. You can help both yourself and the ISOP by going to their website and stocking up on ammo and fishhooks as insurance against a potential collapse of the system.
Clearly, the risk of a serious downturn is now greater than a month ago, and we are about as short as we are going to get. Fasten your seat belts; it’s going to be a bumpy night.
Posted by intelledgement on Thu, 09 Oct 08
Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 30 Sep 2008:
Position = security the portfolio owns
Bought = date position acquired
Purchase Price = price per share
Shares = number of shares the portfolio owns
Cost = what portfolio paid (including commission)
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)
Notes: The benchmark for this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.3%. For comparison’s sake, we also show the S&P 500 index, which historically provides a CAGR of around 10.5%. Note that dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 2% rate of interest on the listed cash balance.
Transactions: Our most active quarter since the inception of the portfolio with five transactions—two sells and three buys, all in September—plus a spate of late-quarter dividends on our reverse ETFs:
- 8 Sep – Bought 97 SKF for $103.24/shr
- 10 Sep – Sold 192 EWZ for $46.85/shr (ROI of 30.4% and CAGR of 17.1%)
- 10 Sep – Sold 243 IXC for $37.16/shr (ROI of 2.8% and CAGR of 1.6%)
- 19 Sep – Bought 112 SCC for $86.23/shr
- 19 Sep – Bought 145 SZK for $68.25/shr
- 24 Sep – SRS dividend of $0.06611/shr
- 24 Sep – SKF dividend of $0.18351/shr
- 24 Sep – SKZ dividend of $0.25196/shr
- 24 Sep – SCC dividend of $0.26147/shr
Performance Review: Yikes! A disastrous quarter for us…and pretty bad for most everyone else, too. It was the worst quarter since we started tracking performance for everyone: us, the Macro Hedge Fund index, and the market overall. Most worst for us, however—the meltdown cost us two-thirds of our profits and nearly allowed the Macro Hedge Fund index to catch back up with us overall. (But not quite.)
We probably waited too long to cash in our Brazil (EWZ) and energy (IXC) funds, but we did manage to notch profits on both transactions…and for what it’s worth, both closed 30 Sep at lower prices than we realized in selling them on 10 Sep. Meanwhile, two of the three reverse ETFs we purchased in September were up for us by the end of the month, so the flurry of transactions definitely improved matters. Our Asian holdings (FXI and IFN) were down again this month as were all of our commodity plays (GLD, SLV, PHO, and DBA). Perversely, even with the market in a panicked retreat, our real estate reverse inverse fund (SRS) was down the most of anything.
YTD, the Macro Hedge Fund index is down 4% while we are down 19%(!) and the S&P 500 index is down 21%(!!). But despite this disastrous quarter, we are still outperforming the field overall, with a total return after 21 months of operation of +11% compared to +9% for the average macro hedge fund and -18% for the market overall.
Analysis: Wow! That happened fast.
We were half right in thinking the crash could most likely be postponed past the Olympics/Election. The Lehman Brothers Chapter 11 bankruptcy filing—and narrow escape for Merrill Lynch, which was taken out for a bargain basement price by Bank of America—on 15 September appears to have been the straw that broke the camel’s back. Credit almost immediately froze solid with banks essentially refusing not only to loan money to each other—that had been the case for months—but to anyone. The Fed responded the next day with an additional $50B injection of liquidity and an $85B loan to AIG (which was already close to failing). By the end of the week, U.S. Treasury Secretary Henry Paulson asked Congress for $700B to fund the so-called “bailout” plan to buy bad paper—mostly mortgage-backed securities—in an effort to improve balance sheets of those institutions holding said failed investments. (A revised version of the plan was enacted on 3 October, after the end of the 3Q08).
Among the many ironies of this extraordinary situation is the spectacle of the princes of capitalism—whose mantra with respect to their relationship to government has consistently been “deregulate, deregulate, deregulate”—on their knees begging for public largess to avert the worst consequences of the meltdown they had helped to engender. But in truth, there is plenty of blame to go around, and poor public governance and poor private governance are most definitely in the mix along with poor corporate governance. In his “Taking Stock” blog on SmartMoney (scroll down to “Fixing Blame”), Igor Greenwald—with tongue somewhat in cheek—took a stab at allocating blame mathematically:
- Mortgage industry – 29%
- Greedy Wall Street CEOs – 16%
- Regulators – 13%
- Alan Greenspan – 11%
- China – 9%
- Credit Agencies – 9%
- Congress – 5%
- Ben Bernanke – 2%
- Henry Paulson – 2%
- Short-sellers – 1%
- OPEC Arabs – 1%
- President Bush – 1%
- Trial lawyers, the media, used-car dealers, drug dealers, pedophiles, bibliophiles, Masons, the Trilateral Commission – 1%
Not a bad first attempt. We would allocate some fault to the promoters and practitioners of consumerism who value instant gratification over considered judgment and who certainly contributed to record debt levels and our near negative savings rate. Presidents Reagan, HW, Clinton, and W all deserve some of the blame for promoting the welfare of special interests over the general good, not to mention presiding over the mistakes of regulators they appointed. W gets a special demerit for declaring after 9/11 that the best way for U.S. citizens to contribute to the triumph of western civilization was to go to a mall and shop. Not to get too nitpicky, but the U.S. Congress is at least as much to blame for our recent trials as China.
It is, of course, important to understand who did wrong—and more importantly, what went wrong—in order to decrease the odds of making the same mistake again anytime soon. But it is more important for us to understand what happens next, so we can optimally deploy our capital. We continue to believe that the underlying strategic problem is that the USA have been living beyond their means both as individuals and as a nation and borrowing money to fund their addiction to conspicuous consumption (rather than investing the proceeds of those loans strategically). The tactical problems stem from an easy-credit fueled housing value bubble which has now burst, resulting in [a] a pullback of consumer spending in particular and the economy in general and [b] a liquidity crisis stemming from the uncertain solvency of financial institutions saddled with varying quantities of “toxic” mortgage-backed securities and corporate paper of unknowable (but certainly reduced) value. These in turn are fueling an economic slowdown that will constrain corporate spending and produce more unemployment, which is likely to exacerbate and lengthen the consumer spending decline…in short, a negative feedback loop is developing here.
The so-called “bailout” package is designed to take the bad paper off the hands of the banks in order to enable them to resume lending to each other and thus unfreeze credit. It is ironic—if not worrisome—that the primary action the government has undertaken to fend off the worst effects of a crisis caused (in large part) by too much easy money is to provide gobs more of easy money. This “solution” doesn’t do much to address the problem of having so many people saddled with mortgages on residential real estate that is now worth less than the money they owe on it. Those loans will obviously have to be renegotiated/restated to avoid a tidal wave of foreclosures that would sink the real estate market still lower. The $700B bailout also does not address the rapid decline in consumer spending—and concomitant slowdown in the world economy—that is happening now. Manifestly some combination of public works/infrastructure projects are needed in that quadrant.
Three months ago, we expressed the hope that if we did get a pre-November crisis, it would elevate the level of political discussion in the USA. LOL so much for that! One candidate has pretty much avoided saying anything except that the crisis demonstrates that the party in power has screwed things up and the other has appeared erratic and buffoon-like, announcing that he would skip the first debate and suspending his campaign to concentrate on the crisis, and then failing to accomplish much and sheepishly showing up for the debate afterall. And that was a letdown—only a murky discussion of the crisis, no mention of entitlements, no serious analysis of the overall financial picture (neither candidate was willing to admit any of their initiatives might have to be scaled back because of lack of funding), no discussion of what the average American has done wrong and what he or she might do differently to make things better. <Sigh>
Conclusion: Hard to be optimistic here. We have not resolved the housing bubble-related issues—foreclosures, toxic mortgage-backed securities, value destruction leading to decreased consumer spending. And whole new sets of problems are arising—corporate profit declines and layoffs, corporate paper issues, the cumulative effect of the liquidity injections on the dollar, collateral damage in emerging markets. Plus we have the “old” strategic issues still hanging around—demographic-related problems such as caring for aging populations, finding non-agrarian jobs for folks coming off the farms in China, adjusting to the contract labor norm and retraining for lost production jobs in the western economies, not to mention a raft of infrastucture and ecological concerns. Accordingly, we now have four sector “reverse” ETFs in the portfolio…we expect continuing challenges for the real estate sector (SRS)—which we already owned a quarter ago—as well as the those we’ve added in the last three months: financials (SKF) and the consumer goods (SZK) and services (SCC) sectors. Although the dollar has been stronger of late, we expect the cumulative effect of the liquidity injections and increased need for borrowing by the USA to eventually degrade value there, and consequently remain long our commodity plays (GLD, SLV, and DBA). As a hedge against a quicker-than-anticipated recovery, we still retain our China and India emerging market funds—as we expect those economies to lead the recovery—and our PHO infrastructure play.
Posted by intelledgement on Wed, 08 Oct 08
If you like goose, odds are good that you’ll like gander.
We closed our Wachovia (WB) short late last month with a 94% profit and cashing in on the hubris of Wachovia management—whose disastrous 2006 purchase of Golden West Financial (GDW) with all their toxic assets sank the company—felt so good that we have decided to follow the toxic assets, as it were. We are shorting Wells Fargo (WFC) as of the open tomorrow, in the wake of that company’s decision to outbid Citibank and buy Wachovia, including all that Golden West cyanide.
Actually, the terms of the deal appear to effectively insulate Wells Fargo from any problems related to the Gold West toxic assets. However, we remain convinced that the valuations of most USA financial institutions are unhinged here given the high level of systemic risk…and extremely likely to go substantially lower. Consequently, we want to replace the WB short in our portfolio, and what better candidate than Wells Fargo, the new owner of the Wachovia “assets.”
(We wish we could have shorted them last week around $39 when the deal was announced but the SEC ban on short selling does not expire until tomorrow.)
Posted by intelledgement on Sun, 05 Oct 08
Well, clearly the fix is in. After rejecting the bailout of the morally and financially bankrupt banks on Monday, enough members of the U.S. House rendered emoluments in the form of a reversal of their position to change the result on Friday and the U.S. taxpayer will soon be cleaning up the mess on the floor left by greedy Wall Street rocket scientists (that’s what they call the guys who dream up derivatives and other weapons of financial mass destruction) and the corrupt mortgage companies who provided the rocket fuel and ratings agencies who aided and abetted the excesses by labeling all the launches safe. (Not to mention the fact that the U.S. government mandated the Freddie and Fannie offer mortgages to folks who could not afford them in the first place.)
This is terrible, shameful, fundamentally dishonest public policy designed to prop up a irredeemably broken and corrupt system. One can only hope that there will be a change in administrations, and that the Obama people will take a different, more honest approach, having as they will the opportunity to blame everything on W. But we aren’t holding our breath waiting for that change, mindful as we are that it was mostly Republicans in the House who voted against the bailout…and Democrats who voted overwhelmingly in favor.
So far as we are concerned, tactically shares of all our bank shorts—Bank of America (BAC), Goldman Sachs (GS), and HSBC Holdings (HBC)—were crushed on Monday when the House rejected the TARP plan and then zoomed when it became apparent the bill would pass, and we are now significantly ahead only on GS. Strategically, it is clear that the government intends to attempt to keep all these companies in business. We believe that shares values are now extremely unlikely to go to zero, but it is not at all clear that government action will (or even can) guarantee everything will now get back to “normal.” The level of systemic risk here is still high, and even if the inevitable shakeout is delayed by government action, things here are unhinged enough that the odds we will have an opportunity to cash in our shorts at sharply lower prices are very good. So, still, we hold here.